People with house

[Jonathan]

With the current low long-term interest rates, assuming that you'll be able to refinance at a better rate in five years doesn't make much sense.

Extremely true. Some of my coworkers were joking that they'd like to do the opposite, and keep their current mortgage while changing properties.

[quantus]

Some of my coworkers were joking that they'd like to do the opposite, and keep their current mortgage while changing properties.

There are mortgages like that, but you'll pay a bit more for them.

[quantus]

I think your calculations are a bit wrong... I've got a book of monthly interest payments at different interest rates...

Let's try a hypothetical comparison of Fixed 6.5% mortgage vs an 5.5% 5/1ARM with max year increase limit of .25% and that interest rates will cap out at around 10%. We'll use a mortgage of $100,000 for 30 years.

Code: Select all

year   fixed    fixed acc.	ARM	ARM acc.
1	  7658	  7658		  6881       6881
2	  7658	 15316		  6881      13762
3	  7658	 22974		  6881      20643
4	  7658	 30632		  6881      27524
5	  7658	 38290		  6881      34405
6	  7658	 45948		  7072      41477
7	  7658	 53606		  7265      48742
8	  7658	 61264		  7461      56203
9	  7658	 68922		  7658      63861
10	 7658	 76580		  7858      71719
11	 7658	 84238		  8059      79778
12	 7658	 91896		  8262      88040
13	 7658	 99554		  8468	   96508
14	 7658	107212		  8675     105183
15	 7658	114870		  8883     114066
16	 7658	122528		  9094     123160
17	 7658	130186		  9306     132466
18	 7658	137844		  9519     141985
19	 7658	145502		  9734     151719
20	 7658	153160		  9951     161670
21	 7658	160818		 10169     171839
22	 7658	168476		 10388     182227
23	 7658	176134		 10608     192835
24	 7658	183792		 10608     203443
25	 7658	191450		 10608     214051
26	 7658	199108		 10608     224659
27	 7658	206766		 10608     235267
28	 7658	214424		 10608     245875
29	 7658	222082		 10608     256483
30	 7658	229740		 10608     267091
Total 229740				 267091	

According to this, you're ahead for the first 15 years of the mortgage with the ARM. There are a lot of places where this might not be realistic, like I'm not sure that .25% is a realistic yearly increase limits for and ARM or that a 10% cap is realistic either. I've heard people say caps were around 8% which would make an ARM not so bad in comparison. With an 8% cap, you wind up paying only about $17.5k more at the end of the 30 years... now, if we were to start figuring in inflation into the equation, it would be even closer. A rough inflation of 2% a year for 30 years says that difference would only be about $10k at current valuation. Since $100k was an arbitrary value, I guess the amount difference is better expressed as ~17.5% of the loan value or ~10% of the loan value after inflation.

[George]

Something I hadn't thought about until this morning: I think ARMs have an advantage for people who plan to pay extra each month. In theory, your monthly payments are lower each month for the first 3/5/7 years compared to the fixed 30 year. If you can afford to pay the 30-year monthly payment, then you could put the difference towards your principal. Then after several years, you'll end up with a higher interest rate (assuming interest rates continue to rise) and a lower principal than the fixed rate so you may be ahead there.

[Peijen]

I think your calculations are a bit wrong... I've got a book of monthly interest payments at different interest rates...

Well my calculation is very simplified, I didn't calculate interest charge on unpaid interest. It was more of rough estimate. With all that said I am willing to accept the fact that maybe I am outright wrong, but I think the general idea is there.

[quantus]

So, does anyone have the numbers to real fixed and adjustable mortgage terms to compare instead of my somewhat made up rates that I can use to do a comparison on? Maybe later, if I'm bored, I'll do the math on what George suggested about paying the 30year fixed rate for the years where the adjustable rate is lower than comparable fixed rate... It'd be more worth it if there were real mortgage numbers to use.

[quantus]

I think your calculations are a bit wrong... I've got a book of monthly interest payments at different interest rates...

Well my calculation is very simplified, I didn't calculate interest charge on unpaid interest. It was more of rough estimate. With all that said I am willing to accept the fact that maybe I am outright wrong, but I think the general idea is there.

It's a very good idea to do rough calculations, but using/making models too simplified for those rough calculations is not a good shortcut. I'm taking this somewhat seriously since figuring out how to afford a house in a few years out here is going to require some creative financing. I'm even playing with the idea of buying to rent out part or all of the house I buy, so I'm paying only for a small part of total payment or maybe get positive cash flow if I'm really lucky out here. It's a lot of calculating to figure this stuff out, so I was kinda hoping that some of you would've already gone through some of the work and analysis so I could borrow from it. It sounds like Jonathan's gonna get to buying a house next...

What's worse, is that this has to be a housing bubble out here. Yet, there's so much money flying around to support it, I'm not sure it'll burst. Damn the google folks bringing a few billion more into this area (at least until some of it trickles into my pocket, although it's more likely to cause money to trickle out of my pocket due to inflation). Anyways, I'm sorta ranting some, so I'm gonna stop now.

[Peijen]

Here are some actual data from my bank's website.

30-Year Fixed Rate Loans
Rate | Points | Rebate | APR | Payment | Closing Fees | Total Cost Apply
5.375% 1.500% $0.00 5.578% $1,007.95 $5,151.00
5.750% 0.000% $0.00 5.818% $1,050.43 $2,451.00
6.000% 0.000% $900.00 6.070% $1,079.19 $1,551.00

15-Year Fixed Rate Loans
Rate Points Rebate APR Payment Closing Fees Total Cost Apply
5.000% 1.250% $0.00 5.301% $1,423.43 $4,701.00
5.500% 0.000% $0.00 5.612% $1,470.75 $2,451.00
5.625% 0.000% $900.00 5.739% $1,482.72 $1,551.00

1-Year Adjustable Rate Loans
Rate Points Rebate APR Payment Closing Fees Total Cost Apply
3.750% 1.000% $0.00 5.932% $833.61 $4,251.00
4.750% 0.000% $0.00 5.953% $938.97 $2,451.00

3-Year Adjustable Rate Loans
Rate Points Rebate APR Payment Closing Fees Total Cost Apply
4.625% 1.000% $0.00 5.439% $925.45 $4,251.00
5.125% 0.000% $0.00 5.473% $980.08 $2,451.00

5-Year Adjustable Rate Loans
Rate Points Rebate APR Payment Closing Fees Total Cost Apply
4.875% 1.250% $0.00 5.439% $952.58 $4,701.00
5.375% 0.000% $0.00 5.518% $1,007.95 $2,451.00

[quantus]

Any chance that you have access to specifics in the terms like the max rate increase per adjustment period, max overall interest rate, etc...?

[Peijen]

Important Notices

The interest rates, annual percentage rates (APRs), points and rebates shown are subject to change without notice.


The monthly payment amount shown includes principal, interest, and mortgage insurance, if required. Your actual monthly payment will be higher if an escrow/impound account is established or required.


Your APR will vary based on your final loan amount and finance charges.


Special information for all adjustable rate mortgages: The APR, interest rate and principal and interest payment are subject to increase and will change after the loan is closed due to market-driven changes to the index. Please refer to the following examples of a 30 year ARM loan with a $180,000 loan amount (assuming a 20% down payment).


3 Year ARM at a 4.25% start rate, the APR is 5.756%, subject to increase. Your payment schedule would be 36 payments of $885.50; 323 payments of $1090.64; and 1 payment of $1082.79.


5 Year ARM at a 4.50% start rate, the APR is 5.733%, subject to increase. Your payment schedule would be 60 payments of $912.04; 299 payments of $1107.91; and 1 payment of $1104.69.

I will see if I can find out about rate increase.

[Peijen]

Interest-Rate Caps

An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:

1. Periodic or adjustments caps, which limit the interest rate increase or decrease from one adjustment period to the next.

2. Overall or lifetime caps, which limit the interest rate increase over the life of the loan.

As you can imagine, interest rate caps are very important since no one knows what can happen in the future. All of the ARM's we offer have both adjustment and lifetime caps. Please see each product description for full details.

Don't seem like it would give me some actual number without calling them or apply for one. But rate variation is tied to indexes.

[quantus]

Thanks, that's a pretty good start. I'll see if I can find out more particulars from people here that have recently bought a house. It's kinda annoying that they won't publish more info.

[Jason]

Ok. I've been away on business for more than a week so I'm just going to respond to as many points as I can.

I'm assuming he is going to buy something worth 275k now. I was factoring in the fact that as he is saving, the price of things are rising and we have pretty high inflation as well. I would say if he wants to put 20% down he needs at least 50k. But then again, we're in a housing market bubble which could pop and change all that. If it's going to happen, it's going to have in the next three years since that's when all the ARM loans will be coming up and people will realize that their salaries haven't risen enough to pay for their place. Salaries have been rising an average of 4% for the last two years, while inflation has been double that I believe.

I was assuming he would be moving states and that's at least 1k. As soon as you have to use a long haul carrier, things jump in price. Mostly because people are moving for a change in job and the company usually picks up the tab.

I have a 30-yr fixed at 5%.

I put 20% down, but only because my parents helped.

I'm interested in how you guys do your calculations and the results. I'm not sure if I should have gotten a fixed mortgage, but I didn't know that much about mortgages then and it was reasonable at the time. One thing, try to factor in closing costs and the like. If you have to refinance every five years you might have to pay 1k in fees each time. Maybe if you stay with the same lender they'll waive the fees.